Dealing with a Down Portfolio

Personal Money Planning |

Dealing with a Down Portfolio

By Gary Silverman, CFP®

Last week I began, again, to talk about the markets. Often this gets a ho-hum from readers, but with various stock and bond indexes heading to bear market territory, interest seems to have risen a bit. While bonds have their own problems, we ended last week with two truths:

First, the stock and bond markets have recovered their losses every single time they have been down as far back as you look. Second, in the 2007-2009 bear market known as the Financial Crisis, most stock indices lost over half of their value. And while I’m not predicting it will happen again anytime soon, I’m not predicting it won’t.

Given the first truth, you should stay invested and ride it out…unless you can figure out when the bottom is going to occur. Given the second truth, you should get out of the market…but only if you can figure out when the bottom occurs so that you can get back in.

You’ll note that fixing the problem in both cases is done well only if you have some sort of financially prophetic gift. The reason that I typically recommend (as regular readers know) to stay invested and ride it out is because most people don’t seem to have that gift. Indeed, riding it out is not optimal…selling at the top and buying at the bottom is…I just don’t know how to know in advance the sell and buy points.

While I’m not hearing yet the “sell before it goes to zero” pleas yet, I am hearing calls to sell now before the markets go down anymore. Since the stock and bond markets are already down, if you didn’t sell out near the top, showing you didn’t have the gift to pick the top, it is likely that you, too, do not have the gift to pick the bottom. And getting the bottom right is important, unless you have decided that stocks (and these days, bonds) are not for you anymore.

So, let’s summarize what you can do now that the markets are already down. 1) You can ride out the downs and wait for the ups to get you back to where you were. 2) You can sell now and get back in before the market goes up. How exactly you’re supposed to know when to buy…I have no idea. 3) You can get out now and give up the idea of investing in things that can go down. There are plenty of other investments out there: CDs, Fixed Annuities, Indexed Annuities, and more that offer downside protection. You’ll want to lower your expectations for the future growth of your portfolio accordingly.

Of course, it would have been nice to figure all of this out ahead of time—before the markets retreated—but better late than never, water under a bridge, and something about spilt milk.

May Ukraine stay free.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.